Bureau of Local Government Finance Opinion

June 18, 2015 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Gatmaytan Yap Patacsil Gutierrez & Protacio Law Office 30/F 88 Corporate Center Sedeo cor. Valero Streets Salcedo Village, Makati City 1227 Attention: Atty. Anthony Mark A. Guiterrez Atty. Marie Yasmin M. Sanchez Atty. Aileen M. Sanguir Gentlemen : This refers to your letter dated May 7, 2015 requesting in behalf of your client, Therma Visayas, Inc. ("TVI"), confirmation of the following: (a) No local business tax (LBT) may be imposed on TVI for a period of four (4) years from the date of its BOI registration; and DETACa (b) Cities cannot impose a tax on newly-started businesses based on capital investment, except only on those engaged in printing and/or publication, or enjoying a franchise. Background: 1. TVI is a corporation duly organized and existing under Philippine law, with principal office at Barangay Bato, Toledo City, Cebu, Philippines. 2. TVI is authorized to engage in the business of building, owning, and operating power plants in the Philippines to provide electric energy locally. 3. TVI intends to construct a 300-megawatt net capacity baseload power plant located in Sitio Looc, Brgy. Bato, Toledo City, Cebu, which it will own and operate. 4. TVI is registered with the BOI as a non-pioneer enterprise. It is your position that TVI should not be liable for LBT for four (4) years from the date of its BOI registration as a non-pioneer enterprise pursuant to Section 133 (g) of the Local Government Code (LGC) of 1991, which provides as follows: " Section 133. Common Limitations on the Taxing Powers of Local Government Units. Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following: "(a) . . .; "(g) Taxes on business enterprises certified to by the Board of Investments as pioneer or non-pioneer for a period of six (6) and four (4) years, respectively, from the date of registration ; ( Emphasis ours ) "xxx xxx xxx." That Office cited Section 3 of Local Finance Circular (LFC) No. 5-93 of the Department of Finance (DOF) prescribing guidelines in the implementation of Section 133 (g) of the LGC, which reads: "Section 3. Exemption of pioneer and non-pioneer enterprises . "(a) Pursuant to Sec. 133 of the LGC and Art. 221 (g) of its IRR, business enterprises certified to and registered with the Board of Investments (BOI) as pioneer or non-pioneer shall be exempt from local business taxes for a period of six (6) and (4) years respectively, from the date of registration ; "(b) Starting January 1, 1992, pioneer and non-pioneer enterprises registered with the BOI prior to the effectivity of the LGC shall be exempt from local business taxes until the end of their six (6) and four (4) years exemption from the date of registration; aDSIHc "(c) Pioneer and non-pioneer enterprises registered with the BOI on or after the effectivity of the LGC shall be exempt from local business taxes for a period of six (6) and four (4) years, respectively, starting from the date indicated in the certificate of registration issued by the BOI; and "(d) In the case of registered expanding firms, the gross sales or receipts directly arising from such expansion shall be exempt from local business taxes for a period stated in (a) and (b) above." That Office also cited the following: 1. Supreme Court ruling in Petron Corporation v. Tiangco (G.R. No. 158881, April 16, 2008) involving the imposition of business taxes on entities engaged in the sale of petroleum products, the Supreme Court recognized that "under Section 133 (g), LGUs are disallowed from levying business taxes on ' business enterprises certified to by the Board of Investments as pioneer or non-pioneer for a period of six (6) and four (4) years , respectively from the date of registration.'" 2. Previous opinions rendered by this Bureau stating that enterprises certified by the BOI as pioneer and non-pioneer are exempt from the LBT. 3. Supreme Court opinions, LFC No. 5-93 and previous similar opinions of this Bureau, which similarly provides that for as long as a business enterprise is certified by the BOI as a pioneer or non-pioneer, it shall be exempt from local taxation for a period of six (6) and four (4) years, respectively from the date of registration. Accordingly, and considering that TVI is a BOI-registered non-pioneer enterprise, said corporation shall be exempt from the payment of local business taxes from August 28, 2012 to August 27, 2016 or for a period of four (4) years. ETHIDa It bears emphasis, however, that the exemption granted to pioneer or non-pioneer enterprises shall apply only upon presentation of the corresponding BOI-certification. Moreover, TVI shall still be liable to pay the Mayor's permit and other regulatory fees or service charges that the local government unit may impose under a duly-enacted local tax ordinance, the exemption being applicable to local taxes only. On the issue of newly-started business, it is your contention that TVI should not be made liable for LBT as a newly-started business in view of the following submissions: (a) Cities have no power to impose LBT on newly-started businesses based on capital investment, except only on those engaged on the business of printing and/or publication and on business enjoying a franchise; and (b) the old laws authorizing the imposition of a tax on certain types of newly-stated businesses based on capital investment have already been expressly repealed (except only for businesses engaged in printing and publication and for those subject to franchise tax). Further, Toledo City may only impose a tax on a newly-started business based on capital investment if it is enjoying a franchise (Section 137 of the Local Government Code of 1991) or it is engaged on the business of printing and publication (Section 136 of the same Code). Moreover, TVI being a corporation engaged in power generation is not enjoying a franchise. In support, Section 6, par. 3 of R.A. No. 9135, n otherwise known as the Electric Power Industry Reform Act of 2001 (the "EPIRA" Law) provides that power generation is not considered a public utility operation and "any person or entity engaged or which shall engage in power generation and supply of electricity shall not be required to secure a national franchise" (Section 6, par. 3, EPIRA Law) That Office further cited the Decision of the Supreme Court applying Section 6 of the EPIRA Law in the case of IDEALS, Inc. v. PSALM Corp., (G.R. No. 192088 dated October 9, 2012) where it declared that no franchise is necessary in order to engage in power generation, thus: cSEDTC "Under the EPIRA, the generation of electric power, a business affected with public interest, was opened to private sector and any new generation company is required to secure a certificate of compliance from the energy Regulatory Commission (ERC), as well as health, safety and environmental clearances from the concerned government agencies. Power generation shall not be considered a public utility operation, and hence no franchise is necessary. Foreign investors are likewise allowed entry into the electric power industry. However, there is no mention of water rights in the privatization of multi-purpose hydropower facilities, Section 47 (e) addressed the issue of water security, as follows: . . ." Similarly, the Court of Tax Appeals ruled in Ormat Leyte Company, LTD. v. Province of Leyte, et al. (CTA AC No. 95 dated September 12, 2013) that entities engaged in power generation are not required to secure a franchise and cannot be subject to local franchise taxes, as follows: "Section 6 of the EPIRA Law is explicit. Power generation is not considered a public utility operation and thus entities engaged or shall engage in such activity are not required to secure a national franchise . As discussed, the BOT Agreement requires petitioner to "convert such Geothermal Fluid and, on behalf of PNOC-EDC, deliver all electrical capacity and energy generated by the Power Plant to NAPOCOR". Basically, petitioner's principal operation involves generation and supply of electricity. As such, it is not required to secure a national franchise for this purpose and consequently cannot be subject to local franchise taxes ." Accordingly, TVI is firmed in its contention that it is not enjoying a franchise nor is required to secure a franchise under the law and therefore not liable to a franchise tax under Section 137 of the LGC which imposes a franchise tax on newly-started businesses enjoying a franchise. Furthermore, TVI is not engaged in the business of printing or publication, thus, the provisions authorizing LGUs to impose tax on newly-started businesses is not applicable to TVI. SDAaTC Another provision of the LGC that was pointed out is Section 534 (c) expressly repealing the Old Tax Code. The pertinent provision is quoted hereunder: "Section 534. Repealing Clause . (a) . . . (c) The provisions of Sections 2, 3, and 4 of Republic Act No. 1939 regarding hospital fund; Section 3, a (3) and b (2) of Republic Act No. 5447 regarding the Special Education Fund; Presidential Decree No. 144 as amended by Presidential Decree Nos. 559 and 1741; Presidential Decree No. 231 as amended; Presidential Decree No. 436 as amended by Presidential Decree No. 558; and Presidential Decree Nos. 381, 436, 464, 477, 526, 632, 752, and 1136 are hereby repealed and rendered of no force and effect. xxx xxx xxx." Relatedly, in connection with the abovecited provisions of the LGC, the Supreme Court in Mencano v. Commission on Audit n (G.R. No. 103982 dated December 11, 1992) explained the term "express repeal" as follows: "The question of whether a particular law has been repealed or not by a subsequent law is a matter of legislative intend. The lawmakers may expressly repeat a law by incorporating therein a repealing provision which expressly and specifically cites the particular law or laws, and portions thereof, that are intended to be repealed. A declaration in a statute, usually in its repealing clause, that a particular and specific law, identified by its number or title, is repealed is an express repeal; all others are implied repeal." In view of all the foregoing and consistent with the previous opinions of this Bureau on cases similarly situated, TVI, as a power generation entity not required to secure a franchise under the abovecited provision of law, is therefore not liable for the payment of initial business tax based on capital investment as it is neither engaged on the business of printing and publication (Section 136 of the LGC) and on businesses enjoying franchise (Section 137 of the LGC), both of which are provincial impositions but may be imposed by cities in relation to Section 151 of the LGC. It is emphasized however, that the herein views are expressed in line with Article 287 of the Implementing Rules and Regulations (IRR) of the LGC and not a declaration of illegality or unconstitutionality of any duly-enacted revenue ordinance or revenue measures, as the same rests with the Department of Justice which has jurisdiction therefor or with the proper court of competent authority, as the case may be. acEHCD We hope that this will help clarify matters. Very truly yours, (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director n Note from the Publisher: R.A. No. "9135" should read as R.A. No. "9136". n Note from the Publisher: the word "Mencano" should read as "Mecano".